Most participants in the private equity and leveraged finance markets are familiar with the recently-settled Clear Channel litigation. Although this litigation was recently settled by the parties, it is likely that the novel arguments and theories raised by the parties in that litigation will affect debt commitment letters for many years to come. This article explores some of the likely affects on debt commitment letters arising out of Clear Channel.
The Clear Channel Litigation
The Clear Channel litigation arose out of one of the last large LBO transactions to be signed up immediately prior to the “credit crunch” of late 2007. The litigation raised many novel legal theories that demonstrate to deal lawyers what can go wrong with commitment letters.
In May 2007, Bain Capital Partners LLC and Thomas H. Lee Partners LP (the “Sponsors”) and Clear Channel signed a merger agreement in which the Sponsors agreed to pay $39.20 per share for Clear Channel. Concurrently with the merger agreement, the Sponsors and a bank group lead by Citibank, N.A. (the “Banks”), negotiated and signed a 71-page long commitment letter. To allow for sufficient time to receive regulatory and third party approvals, the commitment letter and merger agreement each included a drop-dead date of June 12, 2008 for the closing of the definitive documentation. Notwithstanding the length of time before the closing, the commitment letter did not contain “market flex” or “syndicability” language.
In late summer of 2007, the subprime crisis and the resulting credit crunch apparently caused the Banks to approach the Sponsors “hat in hand” seeking some $600 million in concessions in the financing terms. The Banks also apparently had concluded that they would incur a $2.5 billion market-to-market loss on the loans immediately after the loans closed. The Sponsors rebuffed the Bank’s attempt to renegotiate the deal, which caused (according to the Sponsors) the Banks to decide to go to “war” to kill the deal. As the Sponsors alleged in the resulting litigation, rather than trying to terminate the commitments outright, the Banks began demanding onerous deal terms, including new restrictions on the payment of the intercompany debt, that were at odds with the commitment letters and that the Banks knew that the Sponsors would be unable to accept. The Sponsors alleged that the Bank’s design was to present the “facade” of negotiating in good faith while attempting to delay the closing until the June 12 drop dead date by demanding onerous and unworkable deal terms.
To seek to preempt these attempts by the Banks, the Sponsors sued the Banks in New York federal court seeking, among other things, to force the Banks to specifically perform the commitment letters. Clear Channel and the Sponsors also shortly thereafter sued the Banks in Texas state court seeking $26 billion in damages due, among other things, to alleged “intentional interference” by the Banks with the merger agreement due to their unstated unwillingness to fund the deal.
In the New York litigation, the Banks promptly filed a motion for summary judgment, among other things, alleging that specific performance is not available under New York law to enforce a commitment to fund loans. The New York Federal District Court, however, denied this motion and allowed the case to proceed to trial, thereby holding that specific performance was not precluded as a matter of law as a remedy to enforce a commitment to lend. The Texas court also denied motions for summary judgment, and allowed that court to proceed to trial.
In May 2008, after these motions were decided, the parties settled the dispute and the Sponsors agreed to pay a reduced purchase price — $36 per share — and the Banks agreed to finance the deal.
Waivers of Specific Performance
As noted above, the Banks in Clear Channel argued that specific performance is unavailable as a matter of New York law to force a lender to fund loans set forth in a commitment letter. They also argued that specific performance is not available in a non-real estate transaction, to which the Sponsors responded that the Clear Channel assets were unique assets similar to what would be the case if this were a strictly real estate transaction. The Bank’s argument is consistent with wide-spread practice and understanding of lending lawyers in commitment letters prior to Clear Channel– that specific performance is not an available remedy in this context and therefore it is not necessary to include a waiver of specific performance in commitment letters. However, by denying the motion for summary judgment, the New York federal court effectively held that specific performance is an available remedy for loan commitments and is available in connection with non-real estate transactions such as Clear Channel so long as unique assets are involved.
In light of this, our experience after Clear Channel is that lenders are frequently and aggressively seeking waivers of specific performance in debt commitment letters. Sponsors are left to argue that such a waiver is unnecessary in light of the market flex and syndicability language in that those covenants render the final deal terms open to change and thereby make the commitment letter difficult to specifically enforce. If they are unsuccessful in removing a waiver of specific performance, sponsors would need to get comfortable with such waivers on a couple of grounds. First, most commitment letters are much less detailed than the 71 page commitment letter in Clear Channel, and leaving many open points, and therefore would be difficult to specifically enforce by the sponsor in any event. Second, most middle market transactions contain a much shorter pre-closing period than the yearlong period in Clear Channel, such that a market disruption during that period is less likely to occur, thereby rendering it less likely that a lender will seek to escape its commitment.
Shorter, Less Detailed Commitment Letters
In Clear Channel, the Sponsors successfully argued that specific performance would not be a difficult remedy for the court to enforce because the 71 page commitment letter left very few terms to be negotiated and also provided that any remaining terms would be set according to the Sponsor’s historical deal precedent. In light of this, it is likely that lenders will seek shorter, more nebulous commitment letters with many points left open for discussion. Lenders will also be very unlikely to allow unspecified terms to be determined according to the “Sponsor’s historical deal precedent,” and rather will want to simply provide that those terms are “to be negotiated” by the parties or, at most, subject to a “customary” deal terms standard. In the view of lenders, these mechanics will make it less likely that a court will order specific performance, as the many open items in the commitment letter, make specific performance too difficult to enforce.
To counter this trend, sponsors will need to argue that they need more detail in the commitment letter because, if they sign a non-contingent purchase agreement, they need to be sure that there will be few surprises down the road with the financing. Sponsors may also attempt to push this issue down to the seller by making more frequent requests for financing contingencies in the merger agreement or by negotiating a lower reverse break-up fee if the merger falls apart due to the lender’s unwillingness to fund. If neither of these options work, sponsors will need to get comfortable with the lack of detail in the commitment letter by making the time of the commitment and the closing as short as possible to reduce the chances of an intervening market disruption.
Detailed Market-Flex and Syndicability Language
As one of the last deals during the “covenant-lite” era, the Clear Channel commitment letter did not include “market flex” or “syndicability” language. Now that the credit crunch has hit, the days of a lender signing a 71 page commitment letter that does not include these provisions are long gone. Rather, it is more likely that lenders will seek ever-more-onerous market flex language, including language that allows for modifications to terms other than the main business terms of the deal. Sponsors will attempt to limit this language to the main business terms of the deal and seek to impose caps and floors on increases to interest rates and reductions to note amounts and the like. However, lenders will undoubtedly seek to push back on longer-term commitment letters because the risk of a market disruption is higher than for shorter term commitments.
Claim Waivers and Limitations in Merger Agreement in Favor of Bank
In light of the intentional interference claims by Clear Channel against the Banks, it is likely that lenders will become more actively involved in reviewing and commenting upon the claims waiver and claims limitation language in the underlying acquisition agreement. In Clear Channel, the merger agreement contained language to the effect that the $500 million reverse termination fee was the sole remedy against the Sponsors as well as the Banks. However, the language could have been clearer and did not expressly preclude the bringing of tort claims, such as claims for intentional interference of contract. Accordingly, lenders will likely start seeking strong waivers of tort claims (including intentional interference claims) and also be sure that the reverse termination fee effectively limits damages against lenders. Lenders should be able to enlist the sponsors as an ally in these discussions by making clear that the indemnification language in the commitment letter applies to this type of claim, and thereby making it in the sponsor’s best interest to limit this type of claim in the acquisition agreement.
"Ripples of Battle: Debt Commitment Letters After Clear Channel," Private Equity Focus
June 26, 2008Private Equity Focus June 2008